Fail-Proof Ways to Pay Off Our Debt in 2018

I still remember the frosty winter of 2014 when my fiancé and I were searching for our first home. I’ll never forget that year because the burning frostbite left a mark on one of my toes. Though recovered, my affected toe will remain sensitive to the cold and heat for the rest of my life. I guess that’s what you get for rockin’ Hunters in the snow when it feels like -30°C (-22°F). As sad as this may sound, it’s now the memory of our first property. How romantic, right? ❤

Anyway, after going through 20 properties and fierce bidding wars, we finally got the house! I don’t know if that’s a good or bad thing since we offered $70,000 over asking price. But I can still reminisce the moment when we were jumping up and down like little kids at the candy store. The only numbing pain I felt was that annoying frostbite. Needless to say, I was happy enough to ignore it. Sort of.

Canada Lowers Rates in 2015

Unexpectedly, when we bought our first home in January 2015, Stephen Poloz announced a rate cut in response to the oil and energy crisis. As a result, Bank of Canada slashed rates by 25 basis points (BP). And about half a year in, they slashed another 25 BP — a total of 50 BP in 2015. In that event, we were able to secure a rate of 1.80% on the house for about two years.

Being the odd person I am, who screams for joy about cheap money, my reaction to the broker was: “OH. EM. GEE. Like, really?? 1.80%?? No effing way!”

Despite surviving our jobs at the bank, we were a bit concerned with how those rate cuts could eventually impact the financial sector. Rates were already low to begin with. But lowering them further would tighten profit margins even more for banks and insurance companies. Hence, the potential for job cuts at the bank. Though this was a possibility, we still took the risk to invest our money in the markets instead of paying off the mortgage.

We were already doing this with our student loans, at a higher rate, so it wouldn’t make any sense paying down the house. On top of that, we decided to rent out our separate unit to a family. Our tenants were covering most of our mortgage payments, and that gave us room to invest more of our money in the markets.

Fast forward three years, we’re still seeing the bulls run since the crash of 2008. Will it still continue? I don’t know. No one knows.

But we need to be more prudent here because our position is pretty leveraged. Aside from our mortgage debt, we have investment property debt, HELOC, as well as student loans!

Rate Hike Once… Rate Hike Twice… When’s The Next Surprise?

Poloz raised interest rates in Canada by a total of 50 BP this year – once in July, and another in September that shocked most people. As of today, they announced that they will keep the benchmark rate steady at 1% but it’s still a smart idea to prepare for more future hikes.

As a result of this year’s hikes, our mortgage rate increased from 1.80% to 2.30%. Our loan on the investment property increased from 2.15% to 2.65%. And the interest on our student loans increased from 5% to 5.50%. We’re going to knock off the student loan before 2017 ends. Merry Christmas to us!

Here is an article by Ian Bickis. He writes how the rise in rates is a warning that low rates aren’t permanent.

From the article, he writes:

“The rate increase means about $50 more a month for an average $480,000 home in Canada on a variable-rate mortgage, said Janine White, vice-president of RateSupermarket.ca, while Toronto’s higher average housing price of $670,000 means the increase would be about $80 a month.”

So, with the anticipation of further rate hikes, 2018 doesn’t bode well for borrowers who chose float (i.e. us). With that said, our plan for 2018 is to prioritize paying off some debt instead of investing in the markets. It’s not to say that we’re going to fully stop investing. We will still continue investing our bare minimum, but our main focus is to deleverage because our debt to asset ratio is about 50% — not optimal.

Debt to Asset Ratio

For those who don’t know, the debt to asset ratio is a financial ratio used to calculate your leverage. It is your total assets divided by total liabilities multiplied by 100. Although we’re using debt to invest, we still believe in lowering our ratio to about 30% to 40%. According to this article, ratios lower than 40% are considered better debt ratios from a risk perspective.

Continue to go out on Friday/Saturday, but cut back on the Sunday Splurges to pay off debt

On Mondays to Fridays, my fiance and I would make our breakfast, pack our lunch, and eat dinner at home (except on most Fridays). As you can see, we’re pretty frugal here.

However, without thinking about debt the same way most people do, we would usually go out and somewhat loosely spend on the weekends. Two out of the three days, including Friday nights, we would go out for breakfast, lunch, and dinner. When we go out with friends, we would usually spend a bit more. On top of that, we would also order a Venti frap or latte from Starbucks on Saturdays and Sundays. On Friday nights, we would sometimes go out for some ice cream or bubble (boba) tea as well.

We will continue our weekend tradition, but we’re also going to make an effort to reduce our spending.

So, it’s time to embrace frugality on Sundays! And here’s what that means:

1) Sip on one less Starbucks on Sundays

I have to admit we’re already really frugal here.

He would usually order a Venti (equivalent to a large) frap or latte and ask for an extra cup on the side. Instead of ordering two Talls (equivalent to a small), we would both share their largest size. IMO, that’s more than enough for the two of us.

Yummm… I love their peppermint hot chocolate mocha!

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He would usually order this about two to three times a week, but I believe we can skip this on Sundays. Or, instead of fraps and lattes, we can opt for their coffee. After all, we all know how expensive their specialty drinks can get, right?

2) Make breakfast on Sundays instead of going out

Photo by Brooke Lark on Unsplash

Sometimes we would eat in at a restaurant or grab some McDonald’s breakfast due to laziness. Yes, I said it – we are lazy.

Every day before heading out to work, we would eat a banana and make some smashed avocado with toast. So, when the weekend is here, we would feel entitled to eat out two days in a row. How bratty of us, right?

But we came to realize there’s no need to splurge two days in a row. In fact, we’re better off making breakfast at home. Not only is this good for our wallets, it will also force us to wake up earlier.

3) Prepare a salad or pasta on Sundays instead of buying lunch

Again, we felt like entitled lazy brats. But we will start preparing for meals on most Sundays to save money. We’re sure hoping all the money we save can help with the extra mortgage payments! 🙈

4) Join our parents for dinner on Sundays instead of dining out

As Asian parents, they love inviting us over because they cook a lot. If anything, they would ask us why don’t we join them every day!

Based on the below, you can see how much we roughly spend on a typical Sunday.

Unit Cost

Annual Cost

Starbucks

$ 6.00

$ 312.00

Breakfast

$ 20.00

$ 1,040.00

Lunch

$ 30.00

$ 1,560.00

Dinner

$ 65.00

$ 3,380.00

How Much We Spend On Sundays (for two)

$ 121.00

$ 6,292.00

Although we made some decent progress this year with our overall net worth, we still thought: “Really?? Roughly $6,000 just for that bull$hit??”

Now, we’re not going to entirely cut back on Sundays because we believe in enjoying life. And things don’t happen over night. But if we can manage to cut this in half, we would have the option to pay almost two extra mortgage payments for the year!

At the end, we figured that splurging one extra day every week wasn’t adding much more utility. In fact, we’re looking forward to more frugal-fun things to do in 2018!

Let’s see how creative we get on Sundays next year!

5) Sell refurbished furniture to pay off debt

Before the makeover

A piece I worked on in the past. After the makeover.

I have to be honest. I scaled back a lot here because I’ve been trying to focus my efforts on blogging. But if I could even squeeze in $250 to $300 per month, that still equates to $3,000 to $3,600 for the year. Again, that’s almost making two extra mortgage payments for 2018.

Coupled with eliminating the Sunday Splurges, that’s a total of almost four mortgage payments! It sure doesn’t sound like much, but it’s the baby steps that matter.

6) Use our year-end bonus to pay off debt

If neither of us gets laid off or fired from work, and if the company continues to do well, we would expect a combined bonus of about $30,000. Generally, we shelter the max 85% of this money and invest in our companies’ funds where total management fees are no more than 0.02% (for the funds we choose). We will continue doing this, but we will put 15% of the unsheltered money towards the mortgage payment. 15% of that still works out to be roughly $2,700 after tax.

If your company pays you a bonus, we would recommend taking this approach to pay off any debt. Or if you don’t have debt, consider putting the remaining that you cannot shelter into a tax-free investment account (i.e. a TFSA).

I know most people who opt for a 100% cash bonus payout and spend it on a nice vacation or other lavish things. Not only do they get taxed, they are also losing compounding returns on their before-tax money. Their rationale is “I like to see the cash in my account and I have the flexibility to access it.”

Shrugs, what do I know about YOLO? 🤷‍♀️

7) Reduce ourmy addiction to investing in the markets to pay off debt

Hmmmm…………….

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I admit that I’m usually the crazy one who wants to put everything into the markets, whereas he’s the lunatic who wants to hoard cash and time the markets. He sees me writing this! I can understand that he views holding cash as a “call option” with no expiration date (he got the idea from Warren Buffett). I don’t mind hoarding some cash, but selling everything and holding ~100% cash does not exist in my books!

Anyway, I will reduce my temptation to throw everything into the markets for 2018.

As mentioned, our focus is to reduce our leverage ratio to less than 40%.

With that said, we’ll still continue our monthly automatic investment plans such as the:

17 Comments

Wow! Yo have a great plan to kill off your debt in 2018. I couldn’t believe how much you could save by not eating out as much only over the weekend! I need to check that out too, as we tend to go out at least once every weekend. It’s something we know we can cut out on once we reach FI, but now that we work so much we feel we deserve a treat now and then! And I love your refurbished furniture! You have to keep doing that 🙂

Lol yeah for sure we still go out every weekend, but we do it about 2-3 times a week so we’re going to cut it down to once a week (cut Sundays) to see how it goes. But we will continue going out either Friday night or Saturday. 😉

I’m also sure you and Dan will reach FI soon! You’ll have a bunch of rental income! 😊

I only have investment and mortgage debt and I don’t plan to pay it off anytime soon as long as the interest rate is still low. For my investment loans, I tend to lock them for five-year terms as I would like to have cost certainty in my cash flow. I know that it’s not as low as the variable rates, but I am not being affected by the rate increase until I renew my loans.

My strategy is to lock my rates in when it’s low and to go variable when they increase. For now, we still have about more 2% to go before I can consider going variable.

Good stuff here! It still scares me that you got frostbite up there and I’m planning on going to Canada soon.

I definitely spend more liberally on the weekends as well. We hit up a coffeeshop/boba place a couple times each weekend. It does add up, but I think overall it’s a good return on investment for just hanging out with friends.

I definitely wish I still lived close to my parents! Their food is much better than what I can make! They always load me up when I go home to visit!

haha no worries! I think this year’s winter won’t be as cold, and it hasn’t been so far. Our winter in 2014 was pretty cold! Lol!!

And yes, it’s good that we treat ourselves on weekends. I’m not going to cut back like that. Just thought we’d be more conservative on Sundays because we spend quite a bit on Fridays and Saturdays (the real weekend), so we’ll be more cautious on a Sunday!

But that doesn’t mean we won’t hang out with friends! We’ll always hang w/ them.

Great plan you have there. You should take up on your parents offer to have dinner with them at least once a week. This only cuts on the food spending but also more bonding time. We do this every Monday night at my in-law’s house. We all get together along with Mother with Cents’ brother and sister-in-law to have dinner, talk about whatever is going on with all of us and get entertained by Baby with Cents trying to eat his food.

You will never be financially prepared for one, even when you think you are. Before kids we were like you, doubling up mortgage payments and freely eating in restaurants. We carried no credit debt. I now struggle just to keep up with payments, while working 2 jobs and eating out only when our schedule is too hectic to allow me time to cook. In 2018 we look forward to no longer buying diapers (a small savings because I stock up on diapers whenever Costco has a sale) and cutting our daycare costs by 1/4 because my oldest will be in kindergarten in the fall. This is a much more significant savings as daycare currently costs more than our mortgage. You would notice it even more because I believe full day kindergarten is standard in Ont whereas ours is usually 1/2 time in SK. Those nearby parents might also assist you on this front. Even if your parents only watch your kids 1 or 2 days a week it will save you hundreds, and provide them bonding time with grandparents.

Sounds like a great plan. Congrats on knocking out those student loans. The mortgage is a worth while goal although once the loans are crushed I don’t think you can go wrong with investing either! Great job regardless I am sure you are going to have a great 2018.

We will still invest, but just not as aggressively as our usual. So that will give us some room to pay down a bit of debt assuming none of us lose jobs next year haha. Knock on wood!

We took on way more leverage than we should! We’re a bit on the risky side and we should really tone down just a tad bit. With that said, we are going to reduce our debt to asset ratio below 40%. We are currently at 50%. Fingers crossed for 2018!!

Hehe yes! Although we are borrowing to invest, we would really like to reduce our debt to a lower level. So, if cutting back a little bit without depriving ourselves works, then that will be one of our game plans for 2018! 😊

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About Finsavvy Panda

Welcome to Finsavvy Panda!I love everything about saving, investing, earning, and building net worth. I’m all for flexibility and balance, so I’d love ❤ to help you do all of this without having to deprive yourself! Since Oct 2016, my boyfriend and I have been working towards freeing ourselves from corporate bullsh!t to become financially independent. If you want to hop on the happiness boat, come join us!